Tuesday, July 25, 2017

Ultrasound Service Company was a PSC


In Reza Zia-Ahmadi, et ux., et al. v. Commissioner, TC Summary Opinion 2017-39 the taxpayers was the principal of Sound Diagnostic (a C corporation) which provided ultrasound services to medical offices and clinics throughout southern Colorado. Sound Diagnostic entered into professional service agreements with three medical clinics (professional service agreements) in 2009 and 2010. Under the professional service agreements, Sound Diagnostic contracted to provide ultrasound machines and “licensed medical professionals” qualified to perform echocardiography, cardiovascular, and vascular ultrasound services in the medical field of cardiology.

Generally, C corporations are taxed at graduated income tax rates. If, however, a C corporation is a qualified personal service corporation under IRC §448(d)(2), it will be taxed at a flat 35% income tax rate. IRC §11(b)(2).
A C corporation will be treated as a qualified personal service corporation if two tests are satisfied: (1) a function test and (2) an ownership test. IRC §448(d)(2)(A) and (B).
The court found that as the 100% principals of the company and the company employees the taxpayers met the ownership test.
The main issue was the Function Test. The requirements of the function test are met if substantially all of the corporation's activities involved the performance of services in one of the following qualifying fields: health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
Section 1.4487-1T(e)(4)(ii) defines the provision of activities in the field of health as follows:
[T]he performance of services in the field of health means the provision of medical services by physicians, nurses, dentists, and other similar health-care professionals. The performance of services in the field of health does not include the provision of services not directly related to a medical field, even though the services may purportedly relate to the health of the service recipient. For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers.
Sound Diagnostic asserts that its employees do not perform services in the field of health because employees who operate the ultrasound equipment (sonographers) are not required to be licensed in Colorado, do not provide direct treatment services to patients, and do not make healthcare decisions.
The Court has held that the scope of the qualifying fields under IRC §448(d)(2) does not turn on State licensing laws citing Kraatz & Craig Surveying, Inc. v. Comm’r, 134 T.C. 167, 181 (2010). Rather, whether a service is performed in one of the qualifying fields “is to be decided by all relevant indicia, including the text of the statute, its legislative history and regulations, application of the normal meaning of the term `health'***and examination of services historically regarded as within the qualifying field.”
Sound Diagnostic proposes a narrow interpretation of the term “health”. The Tax Court previously rejected taxpayers' overly restrictive arguments in defining the various services listed in the IRC §448 temporary income tax regulations. Rainbow Tax Serv., Inc. v. Commissioner, 128 T.C. 42 (2007) (holding that the taxpayer's definition of accounting services was overly restrictive).
The court noted that the temporary income tax regulations do not so narrowly construe the requirements of the function test under IRC §448(d)(2). Rather, the phrase “field of health” includes services provided by healthcare professionals that are directly related to a medical field. See IRC §1.448-1T(e)(4)(ii).
The court cited the two year training which the taxpayer had to undergo to administer an ultrasound.
The court ruled that sonographers are more similar to physicians and nurses than to health club or health spa employees. Therefore, the taxpayer, in performing the ultrasound activities as a sonographer, was a healthcare professional.
PRACTICE POINTER:
Under IRC §448 a C corporation which is a personal service corporation can use the cash method even if their gross receipts exceed $5,000,000. That's the good news. The bad news is the result reached here; as a C corporation it earnings are taxed at the highest corporate rate. 

Thursday, July 20, 2017

Streamlined Processing of Installment Agreements


The IRS is testing expanded criteria for streamlined processing of taxpayer requests for installment agreements. The test is scheduled to run through September 30, 2017.
During this test, more taxpayers will qualify to have their installment agreement request processed in a streamlined manner. Based on test results, the expanded criteria for streamlined processing of installment agreement requests may be made permanent.
During the test, expanded criteria for streamlined processing will be applied to installment agreement requests submitted to SB/SE Campus Collection Operations, this includes the Automated Collection System (ACS). Expanded criteria will not be applied to installment agreement requests submitted to W&I Accounts Management, SB/SE Field Collection or through the Online Payment Agreement application.
One expanded criterion being tested immediately is this: Individual taxpayers with an assessed balance of tax, penalty and interest between $50,000 and $100,000 may experience accelerated processing of their installment agreement request. This will occur if the taxpayers' proposed monthly payment is the greater of their total assessed balance divided by 84 – or – the amount necessary to fully satisfy the liability by the Collection Statute Expiration Date.
For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest of $50,000 or less,
 
CURRENT Streamlined CRITERIA
TEST CRITERIA
Payment Terms
Up to 72 months – or – the number of months necessary to satisfy the liability in full by the Collection Statute Expiration date, whichever is less
Payment Terms
None. This criteria is unchanged.
Collection Information Statement
Verification of ability to pay required in event of an earlier default for assessed balances of $25,001 to $50,000
Collection Information Statement
Not required.
Payment Method
Direct debit payments or payroll deduction required for assessed balances of $25,001 to $50,000
Payment Method
Direct debit payments or payroll deduction is preferred, but not required.
Notice of Federal Tax Lien
Determination not required for assessed balances up to $25,000.
Determination is not required for assessed balances of $25,001 - $50,000 with mandatory use of direct debit or payroll deduction agreement.
Note: If taxpayer does not agree to direct debit or payroll deduction, then they do not qualify for Streamlined IA over $25,000.
Notice of Federal Tax Lien
No change in criteria for assessed balances up to $25,000. 
Determination is not required for assessed balances of $25,001 - $50,000 with the use of direct debit or payroll deduction agreement.
Note: If taxpayer does not agree to direct debit or payroll deduction, then they do qualify for Streamlined IA over $25,000, but a Notice of Federal Tax Lien determination will be made.
The test criteria discussed above also applies to all out of business debts up to $25,000 and all out of business sole-proprietorship debts up to $50,000. For in-business taxpayers, test criteria apply to income tax only debts up to $25,000.
For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest between $50,001 and $100,000,
CURRENT CRITERIA
TEST CRITERIA CHANGES
None - Streamlined processing criteria currently does not apply to assessed balances of tax between $50,001 and $100,000
 
Payment Terms
Up to 84 months – or – the number of months necessary to satisfy the liability in full by the Collection Statute Expiration date, whichever is less
 
Collection Information Statement
Not required if the taxpayer agrees to make payment by direct debit or payroll deduction
 
Payment Method
Direct debit payments or payroll deduction is not required; however, if one of these methods is not used, then a Collection Information Statement is required.
 
Notice of Federal Tax Lien
Determination is required.
The test criteria discussed above also applies to all out of business sole-proprietorship debts between $50,001 and $100,000.
 


Monday, July 10, 2017

Return of the New Jersey Homestead Rebate


L. 2017, A5000, effective 07/04/2017, establishes homestead benefit eligibility for the 2015 tax year. The legislation provides that taxpayers who are at least 65 years of age, disabled or blind will receive a homestead benefit for the 2015 tax year of: (1) 10% of the first $10,000 of property tax paid on their residence if their New Jersey gross income was not in excess of $100,000; (2) 5% of the first $10,000 of property tax paid on their residence if their New Jersey gross income was in excess of $100,000 but not in excess of $150,000; and (3) no benefit if their New Jersey gross income is in excess of $150,000. Taxpayers who are under 65 years of age and not disabled or blind will receive a homestead benefit of: (1) 10% of the first $10,000 of property tax paid on their residence if their New Jersey gross income is not in excess of $50,000; (2) 6.67% of the first $10,000 of property tax paid on their residence if their New Jersey gross income is in excess of $50,000 but not in excess of $75,000; and (3) no benefit if their New Jersey gross income is in excess of $75,000.

Friday, July 7, 2017

IRS finalizes regulations that provide for streamlined small exempt organization application process


Since 1969, IRC §508 has required an organization seeking tax-exempt status under section 501(c)(3) to submit a properly completed and executed Form 1023, “Application for Recognition of Exemption Under 501(c)(3).

 On July 2, 2014, final and temporary regulations authorizing the Commissioner to adopt a streamlined application process that eligible organizations may use to apply for recognition of tax-exempt status under section 501(c)(3) were published in the Federal Register (79 FR 37630). The final and temporary regulations were effective and applicable on July 1, 2014. The 2014 final regulations removed and reserved certain paragraphs of the longstanding final regulations addressed by corresponding paragraphs of the new temporary regulations. Under the temporary regulations, the IRS instituted the streamlined application process on Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under 501(c)(3) The detailed procedures are described in Rev. Proc. 2017-5, 2017-1 IRB 230, and in the instructions for Form 1023-EZ.

Eligibility Requirements:

An organization is an eligible organization if the organization meets all of the following criteria:

    • The organization has projected annual gross receipts of $50,000 or less in the current taxable year and the next 2 years;
    • The organization had annual gross receipts of $50,000 or less in each of the past 3 years for which the organization was in existence; and
    • The organization has total assets the fair market value of which does not exceed $250,000. For purposes of this eligibility requirement, a good faith estimate of the fair market value of the organization's assets is sufficient.

 Because the proposed regulations contemplate that guidance published in the Internal Revenue Bulletin may prescribe the information required of Form 1023-EZ filers, including regarding their proposed activities, the Department of the Treasury (Treasury Department) and the IRS have concluded that the proposed regulations are sufficiently flexible to allow such a revision to the Form 1023-EZ at a future date, as resources permit. Accordingly, this Treasury decision adopts as final regulations, without substantive change.

 

 

 

Tuesday, June 27, 2017

Rentals not treated as passive investment income for S corporation purposes


In PLR 201725022 a corporation received rental income from its leasing of offices for medical and related services.  The taxpayer intended the rental income from its maintenance-related operations as non-passive investment income under section 1362(d)(3)(c)(i).

X was incorporated as a C corporation. X had accumulated earnings and profits. X intended to elect to be an S corporation. X was in the business of acquiring, developing, leasing and managing commercial real estate, concentrating in medical office suites and clinics.

X owned a parcel of land situated on two contiguous lots. X acquired this parcel of land and at the time of acquisition, it was partially developed as a plaza containing various buildings and commercial office space. X later constructed another building and a separate two-story building. All the property was converted into medical suites.

All of the suite space comprising was leased for use as medical offices and/or related services.

X contracted with an independent leasing agent to assist in soliciting prospective tenants, negotiating leases and renewals, and overseeing post-leasing activities such as build-outs and renovations of suite space. X, with the assistance of the independent leasing agent, drafted and negotiated letters of intent to lease available suite spaces. Once letters of intent were accepted, X, with the assistance of the independent leasing agent, prepared lease agreements and renewals with prospective tenants.

X, through its employees, its agents, and the agents' employees, provided services in maintaining and repairing of the buildings, common areas, and grounds. X utilized a standard lease agreement for its tenants, and under the lease agreement X had the obligation to provide certain services with respect to the leasing of space and to maintain or repair the heat and air conditioning systems, plumbing, hot water heaters, exterior lighting, signs, lawn care and gardening, roofs and exterior walls, exterior walkways, courtyards, parking areas, electricity, water and sewer, drainage, and garbage pickup.

In addition, X provided services to its tenants by daily walk-through inspections to report on water breaks, lighting outage, vandalism, damage to building exteriors and certain interior spaces; sweeping, cleaning and maintaining the common areas such as sideways, walkways, and parking lot; routine periodic inspection of building exteriors and interiors, including foundations, roofs, exterior lighting, grounds, and parking lot and engaging in maintenance and repairs as needed; treating the roofs of the buildings for moss growth yearly; recoating and resurfacing the parking lot; routine and periodic maintenance of the numerous heating and air conditioning units; renovating vacant suites for leasing; routine and periodic maintenance of the plumbing and sewer lines, and their repair and replacement as needed; maintenance, repair and replacement of exterior lighting and selected interior lighting; janitorial services for selected units and common areas; exterior window washing; regular maintenance of grounds and lawn care, and landscaping services when necessary; seasonal snow removal and ice control; weekly trash removal; periodic pest and vermin control; and emergency response and property access for public safety.

The IRS had to decide if the rental income was active or passive. Additionally if the income was passive could the corporation elect S status.

As S election is terminated whenever the corporation (1) has accumulated earnings and profits at the close of each of three consecutive taxable years, and (2) has gross receipts for each of such taxable years more than 25 percent of which are passive investment income.

Section 1362 provides that the term “passive investment income” means gross receipts derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities.

Section 1.1362-2(c)(5)(iii)B)(i) of the Income Tax Regulations provides that “rents” means amounts received for the use of, or the right to use, property (whether real or personal) of the corporation.

Section 1.1362-2(c)(5)(ii)(B)(2) provides that “rents” does not include rents derived in the active trade or business of renting property. Rents received by a corporation are derived in the active trade or business of renting property only if, based on all of the facts and circumstances, the corporation provides significant services or incurs substantial costs in the rental business. Generally, significant services are not rendered and substantial costs are not incurred in connection with net leases. Whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all of the facts and circumstances including, but not limited to, the number of persons employed to provide the services and the types and amounts of costs and expenses incurred (other than depreciation).

The IRS concluded that the rental income X receives from its operations described above was not passive investment income under section 1362(d)(3)(C)(i).

Similarly Temp. Reg. § 1.469-1T(e)(3)(ii)(C) provides that if a taxpayer provides “extraordinary personal services … in connection with making such property available for use by customers,” then the activity is not treated as rental property.  The term “extraordinary personal services” includes those services that “are provided in connection with making property available for use by customers … [where] the use by customers of the property is incidental to their receipt of such services, Temp. Reg. § 1.469-1T(e)(3)(v).  Unfortunately, this Regulation does not contain an example that is directly on point.  However, in a Tax Court case, Arsaf F. Al Assaf, 89 TCM 694, T.C. Memo. 2005-14, the court agreed with the taxpayer that the personal services provided were extraordinary.  As result the activity was not considered rental.  In that fact pattern, a limited liability company (LLC) owned an office building and provided substantial support services to its tenants who leased the space to obtain the services.  Thus, the court concluded that the lessees’ payments to the LLC were principally for the services, not for the leased space.  After avoiding classification as a rental activity, the activity was found to be not passive because the taxpayer’s participation exceeded 500 hours per year. 

Wednesday, June 14, 2017

IRS Reissues Partnership Audit Regs In Almost Identical Form

 The Internal Revenue Service on Tuesday reissued controversial regulations for auditing partnerships in almost identical form as those withdrawn in January following an executive order halting new rulemaking activities.

The long-anticipated rules, contained in 277 pages, interpret the new partnership audit scheme passed by Congress under the November 2015 Bipartisan Budget Act to assess and collect tax at the partnership level instead of at the level of individual partners.

Thursday, December 15, 2016

Business and other standard mileage rates decrease for 2017


The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will decrease by 0.5¢ to 53.5¢ per mile for business travel after 2016. This rate can also be used by employers to provide tax-free reimbursements to employees who supply their own autos for business use, under an accountable plan, and to value personal use of certain low-cost employer-provided vehicles. And, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction will decrease by 2¢ to 17¢ per mile.

The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving.



Employers that require employees to supply their own autos may reimburse them at a rate that doesn't exceed the business mileage allowance for employment-connected business mileage, whether the autos are owned or leased.) The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos may be valued at the optional mileage allowance if the conditions specified in Reg. § 1.61-21(e)(1) are met.



A separate rate applies for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction.) The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that's not adjusted for inflation.

IRS generally adjusts the standard mileage rate annually, based on a yearly study of the fixed and variable costs of operating an auto. However, IRS has made mid-year adjustments in certain years when necessary to better reflect the real cost of operating an auto in light of rapidly rising gas prices.



Depreciation. For 2017, provides that the depreciation component of the mileage rate for autos used by the taxpayer for business purposes is 25¢ per mile. (It was 24¢ per mile for 2016 and 2015; 22¢ per mile for 2014; and 23¢ per mile for 2013.) The depreciation
component reduces the basis of the auto for gain or loss purposes.



 A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a fixed and variable rate (FAVR) allowance method) for the entire lease period.) Employers may use a FAVR allowance method to reimburse employees who supply their own cars for business (whether the cars are leased or owned). For 2017, the standard auto cost used to compute the FAVR allowance cannot exceed $27,900 (down from $28,000 for 2016). For trucks or vans, the 2017 standard auto cost used to compute the FAVR allowance cannot exceed $31,300 (up from $31,000 for 2016).